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The "Panama Papers" revelation by a group of investigative journalists has shaken the world. Millions of documents leaked from the Panama-based law firm Mossack Fonseca show that politicians, business leaders and officials in numerous countries have been avoiding taxes on an industrial scale.

The fallout is already considerable. Questions have been asked in the UK Parliament about the tax affairs of the UK
Prime Minister’s father. The Prime Minister of Iceland, faced with huge popular protests, has resigned: there are now calls for the entire government to follow suit. And a $2bn trail of shady financial deals appears to lead directly back to Russia’s President Putin.

Rather less surprising was the revelation that banks, accountants and lawyers have been systematically helping these dignitaries to avoid tax. “What were you expecting?” was the general reaction to the discovery that Swiss banks (including the already embattled HSBC Suisse), French banks and German banks – well, European banks generally, in fact - were in it up to their necks. If banks were hoping that the era of investigation and litigation was coming to an end, they have now been sorely disappointed.

But the finance industry is fighting back. In a statement, Nigel Green, founder and CEO of international financial advisers de Vere Group, disputed that the allegations made in the Panama Papers were in any way representative of the international financial services industry:

The overwhelming majority of the offshore sector only provides services that are fully compliant and legal and they are used by law-abiding clients, who are simply looking for typically better returns, more investment options and greater flexibility.

Mr. Green’s argument is essentially that the Panama Papers are old news. The offshore finance industry has served its time and is now a reformed character:

Many of the documents that have been revealed by the Panama Papers case date back decades. For the last several years a new and totally unprecedented era of transparency and disclosure has been ushered in.

This is to some extent true. Banks and financial institutions, whose misconduct stands revealed under the harsh light of regulatory investigation, have indeed been forced to mend their ways. And a new focus on tax collection by cash-strapped governments has brought about unprecedented cross-border cooperation between tax and regulatory authorities. Tax havens, forced to reveal their doings to a disapproving world, are not what they used to be.

View of buildings in Panama City on April 4, 2016.. (RODRIGO ARANGUA/AFP/Getty Images)

But they are by no means dead yet. Green’s claim that it is “almost impossible to hide money” is very far from the truth. Money is still being stashed away secretly: the offshore finance industry still helps people protect their assets from seizure. To be sure, some of those seeking to hide their wealth have genuine reasons for doing so. Not all governments are benign. But how do we distinguish between those whose desire for secrecy is legitimate and those who are concealing criminal activity?

It is not remotely credible that the finance industry has no more skeletons waiting to be discovered. There are still many cases of misconduct outstanding. And although many of the Panama Papers date back years, not all of them do. For example, some of those concerning
Deutsche Bank only date back to 2015. The offshore financial industry is only as reformed as regulators and litigation force it to be. And since the Panama Papers reveal extensive involvement of public officials in tax avoidance schemes, we must surely wonder how effective regulators really are at uncovering misconduct.

After all, as President Obama says, a lot of this stuff is legal – and that’s the problem. Law enforcers can only act when laws are broken. When tax avoidance is legal, law enforcers are powerless. Regulators perhaps have more scope to define moral responsibilities, but as long as banks and other intermediaries are acting within the law, regulators can only hope to persuade them to take a more responsible attitude. And regulators have no power to ensure that the customers of banks act morally or even legally. They rely on banks to apply Know Your Customer and anti-money laundering regulations, and banks can be censured and fined for failing to do so. But when a bank is simply a passive intermediary in a much larger chain of fraud and tax evasion, it may lack sufficient information to detect the fraud – especially if some of the transactions are legitimate, as they would be in money laundering (since you clean up dirty money by using it for legitimate transactions). This is the defense that will probably be used by banks involved in the FIFA wire fraud.

The fact is that (legal) tax arbitrage is big business – and countries like it that way. Harmonizing tax rules, in particular, is fiercely resisted because of the implications for national sovereignty. Countries defend to the death the right to determine how they will tax their populations, and other populations as well to the extent that they live and work in that country. While this remains the case, those with the means and the motive to do so will continue to exploit tax differences between countries. The offshore financial services industry principally serves this internationally mobile elite. Should it do so? That is a reasonable question – but governments may not like the answer. How do you prevent tax arbitrage without harmonizing international tax rates? What would be the consequences of regulating the offshore financial industry out of existence?

It is a fact that offshore financial flows are far smaller than they used to be. But I wonder whether this has much to do with the elimination of illegal activity. The credit derivatives spiral of the mid-2000s depended for its existence on a thriving and largely unregulated offshore financial industry. When it collapsed in 2008, a large part of the offshore financial industry disappeared with it. The Eurodollar market, which is almost entirely offshore, is a shadow of its former self, not because of regulatory investigation – though this is a factor – but principally because it is no longer the main driver of a transatlantic financial bubble. And as David Stockman explains, it is still shrinking, mainly because of the severe retrenchment in global investment banking.

Clearly, the internationally mobile elite will continue to demand offshore financial services. So in yet another bizarre twist in this extraordinary story, Green suggests that the Panama Papers revelations are important not because they create an opportunity for countries to clamp down on aggressive tax avoidance, but because the international elite needs the offshore finance industry to clean up its act:

Indeed, this should act as an opportunity to further enhance the effectiveness and credibility of these international financial centers and the sector. This is especially important as the industry is set to grow exponentially in the coming years as individuals and companies become ever more globalized.

I used to work for banks. Now I write about them, and about finance and economics generally. Although I originally trained as a musician and singer, I worked in banking for 17 years and did an MBA at Cass Business School in London, where I specialized in financial risk mana...